Gevo, Inc. (NASDAQ:GEVO)
Recently, I've been going back and forth with Pat Gruber, CEO of GEVO with regard to what we're seeing from the company. Yesterday, I had the pleasure of speaking with him once again, and I have to say, I'm more bullish now than ever. Keep in mind that before all interviews, I let my followers know who I'm talking to on StockTwits, allowing them to ask their questions. A good portion of this interview is questions that investors wanted answers to!
CNA Finance Exclusive Interview With Pat Gruber From GEVO!
In the last conversation between Pat and I, he touched briefly on iso-octane. However, I wanted to delve deeper into this concept because, if it was what I thought it was, this could be something massive. So, the first question I asked Pat was, “What is iso-octane and what does it mean for GEVO?” Here's what he had to say:
“Iso-octane is an 8 carbon hydrocarbon. So, it's 8 carbons long, it's a hydrocarbon, and everybody is familiar with it, even though they don't know it. It is the stuff that gasoline is made from. When people talk about buying gasoline, in your standard stuff that you buy, like at a gas station, that's really, predominantly, iso-octane. Now, we learned how to convert our isobutanol into iso-octane. Isobutanol has 4 carbons. So, if we put two of them together and strip off the oxygen, we're left with 8 carbons, and that is iso-octane. And so, a practical way to think of it is this... where ethanol is focused on 10% of a gallon of gasoline, we would say, 'Huh, that's nice, let's do the other 90%!' And that's where our stuff comes into play.
As the world starts to move toward these low-carbon fuels, how do you really truly reduce greenhouse gasses? Then, our product really becomes interesting because we more have green carbon that could be put into a gallon of gasoline than could ever be done by ethanol or any of these other products.
The part that people get confused by is octane is also used in a efferent sense in that we've seen at the gas pumps, there are different ratings. Like 85, 87, 91, 93, or 100 or whatever, and they generally view that as, you know, a cheap gasoline compared to a really premium gasoline. In fact, even the words are used that way. Premium is either a 91, 93, or 100. A lot of the high compression engines, the fancy engines that are out these days need high octane.
Now, octane is related to how the fuel burns, and the power at which it burns. So, the higher it is, generally the more power it generates as it burns, and the more compression. One of the things that's interesting is... ethanol itself gets a pretty high octane rating because of the way it burns. Now, it doesn't burn with a whole lot of energy, so it generally results in fewer miles per gallon, but it works well in high-compression engines. As cars are being developed to meet the CAPA standards, they use... the car companies are starting to install and have been installing high compression engines to get better mileage per gallon overall. But unfortunately, ethanol simply doesn't have the energy content, but it does have the octane value measurement.
OK, set that aside for a second... Ours IS octane, it is the stuff! So, this is where it gets confusing for the ethanol guys. If someone says iso-octane, [they say], 'Well that's the benefit of ethanol.' Well, yea, except for... ethanol does have high octane, but it has low energy. This, we're talking about the actual, real, live, is the octane. It is the real stuff! It has the energy, you get the miles per gallon, you don't sacrifice anything, and you get the high octane out of it, and you replace that other 90% of a gallon of gasoline.”
You'll see what I'm getting at pretty quickly here. My next question was simple. When blended, is isobutanol the other 10%? Here's what the CEO of GEVO, Pat Gruber, had to say:
“Yeah, so, isobutanol gets blended in at 12 or 16 percent and they both work well. For on-road use, we would do 12% and for off-road use, we do 16%.”
With that answer in mind, I've lead up to what I really wanted to know. Is it possible to make a 100% Gevo fuel using a mix of iso-octane and isobutanol? Here's what Pat had to say:
“Yes... If we took our iso-octane and we blended it with isobutanol, yea, we'd be up in the very, very high 90's. We might have to add in some other stuff for... you know, treatments or something like that, but yup, we'd be up in the very, very high [90's]. The whole gallon... we could claim pretty much the whole gallon.”
I went on to ask what the plans were with regard to doing just that. Are there plans to promote a fuel that is derived completely from isobutanol for on-road use? Here's what Gevo's Pat Gruber had to say:
“Well we do! We have plans to do that. So, this is the whole point about talking about iso-octane, getting people jazzed up about it because, you know... The isobutanol is great, it works really good, it serves as an oxygenate, it helps the fuel to burn clean. Our iso-octane, you know, the majority of the gallon, as we put it in there. That iso-octane, it also is clean burning. We don't have the sulfers we don't have the other crap that's in there, that comes with oil. So yeah, that's got potential. This is why the Red Bull racing team has been using our stuff and why, in Europe, a lot of folks have been buying it - paying a premium for it, too, in order to blend it into gasoline for high performance fuels. It's about how much renewable carbon can one stuff into a gallon. That's where the future's going.”
I said, it sounds like GEVO is ahead of it too, and expressed that I was impressed. Pat went on to explain:
“We're the only ones who know how to make it so far. You gotta be able to make the isobutanol cheaply or have a vision to make it cheaply, and then know how to convert that isobutanol into the iso-octane. It's a chemistry step to convert isobutanol. It's a chemistry step to convert it into iso-octane, which is the hydrocarbon.”
With Dr. Gruber saying that the GEVO iso-octane is being sold in some areas already, I wanted to know what the numbers were. So, I asked what the prices per gallon were and what the cost of production was. Here's what he had to offer:
“I don't recall that we've disclosed the prices per gallon. The selling prices have been in the many, many, many tens of dollars per gallon. It's an extremely high premium, and we haven't disclosed the cost.”
I went on to ask if there was anything in the Butamax settlement that will disrupt the promotion of iso-octane or isobutanol for road use. Here's what Pat had to offer:
“No, there isn't. So iso-octane is... we can do whatever we want with. Isobutanol, for on-road use, we have a deal with them in that once we get up to about... I guess it would equate to about $100 million in isobutanol sales, to on-road gasoline blend stocks, the we will be collaborating with them, and we would have to pay them a royalty. And they would have to do the same with... the quid pro quo was that they would do the same on jet fuel. The idea was to be marketing partners. That was actually the idea of that agreement.”
I went to ask what the plans were with regard to scaling up the iso-octane production and what are some of the hurdles Gevo faces in the process. Here's what Dr. Gruber had to offer:
“We've been actually making it since 2011 in Silsbee, Texas along with our jet fuel. So, we're feeling pretty comfortable with how to do it because we've been doing it for so long. As we scale up the jet fuel, we'll also be scaling up the iso-octane, which is probably the reason we're starting to talk about it more. We've been making it and selling it for years. We just don't talk about it widely. But now, as we get our plans together to ramp up on the jet fuel side, we need to start educating people about the iso-octane.
Now, I would also add that the business climate has changed, the market climate has changed, in that there's more and more interest in low-carbon fuels. Iso-octane is a way to put more low-carbon gallons into the marketplace. So, it becomes more relevant. 5 years ago, we just viewed it as a specialty product, maybe for racing or for airplanes. It works well in propeller-driven piston planes. Whereas now, with the shift in the marketplace, people are really trying to put pressure on low-carbon fuels... you know, it has relevance too, and that makes it much, much more interesting and relevant on a large scale.”
We know at this point that there is no competition in the iso-octane arena, but I wanted to know more about whether or not GEVO was concerned about competition in the future. So, I asked if there was any up and comers the company is keeping tabs on. Here's what Pat had to say:
“[There's] nobody just behind us. There's a company called Global Bioenergies out there who has a focus on... they have a different fermentation technology to make a chemical called butylene. It's a 4-carbon building block. And then they would take that onward into a process to make iso-octane. They had some press in the last few months about it. But that's … you know, that'll work in certain circumstances, I suppose. I think ours, ultimately, would be cheaper, and we're definitely further ahead. They're in the pilot plan scale. So, we're probably in the years-ahead category there, but you just never know for sure.
For us, when we do jet fuel, we do make iso-octane too, and we want to and have been! So, it's kind of a well-explored territory for us.”
Finally, I wanted to know if there was any possible strategic partnership or licensing down the road that may help Gevo with scaling the process. Here's what Pat had to say:
“We have a deal with Total that we announced a couple of years ago that people forgot about. It's basically that they buy some of our octane, and the answer to your question is... they're buying our octane because they're the ones who have been supplying Red Bull Racing.
The answer to your question is yes... there's lot's of people interested in our iso-octane. So, it will be interesting to see what we unfold and then when we can talk about it.”
The following questions were questions that were asked specifically by followers on StockTwits. Here are your answers my friends!
Does Pat see a significant profit margin increase for GEVO by scaling up?
“Yes. As we scale up and build out the capacity of Luverne and [get it] switched over from... you know get rid of ethanol and make isobutanol instead, we'd see substantial increases in margin, as we would expect. We've talked about it, many times, being in that $0.50 to $1.00 per gallon margin range. That's what we would expect, and there's nothing that we've ever done that would make it different than that. Even after we've touched the marketplace and scaled up our product to where it's at now. It all looks good from that standpoint.”
How many gallons of isobutanol did GEVO produce in August?
“We'll announce that in our quarterly results.”
Any news on upcoming flights?
“Again, this is the business of the airline and we talked about this last time. The only thing I can reiterate is that, at some point, Alaska had said that they'll be flying on cellulosic jet fuel. I think that's true... they will!”
What's the deal with restructuring debt? Cowen was hired in May and we still haven't heard anything.
“That's something we'll talk about at the appropriate time. Obviously, we're working on it, we just can't be talking about it prematurely.”
With the new laws in Europe surrounding clean energy, what are the global plans? Are there plans to attack this market?
“Interestingly enough, a lot of our interest in our products comes out of Europe. So, that's where the vast majority of our iso-octane has gone over the last years is to Europe. And it is because they have very few good alternatives into how you do renewable or low-carbon fuels. Our stuff works well. The jet fuel is the same kind of a story. It's relevant in Europe and in the US. We have had many, many discussions over the years with how would we build out capacity in Europe? And there's definitely opportunities there. But, we've got to do first things first. Let's get our act together and make it work really, really well at Luverne. Let's get it built out, make our octane, jet fuel, and such, and make it beyond any shadow of [doubt in] the biggest skeptic that this stuff actually works and makes money. Then I think all of those opportunities are all much, much, much, much easier. Not to say we don't work on them now... we do! But it's still... we have to do first things first.”
How have sales on the isobutanol blend been thus far?
“You know what, I can tell you. One of my guys, Greg Roda, he's one of my senior guys doing... he's responsible for the business development here. He was just out at Lake Havasu over the weekend talking with people who were fueling up on our stuff. You know, people like it. It's going well. So, they were selling quite a bit of it. The interest is in these high performing fuels that don't have ethanol... that's the value proposition. People are supportive of having renewable content if it works good. Having a choice where it has renewable content and it works really well... that's a good thing. Plus, this product has been endorsed by all the major engine manufacturers.”
Is there any news from GEVO with regard to listing requirements?
“We just updated people and said we had another six months... I can't imagine a circumstance where we would be... and I think we had this conversation one other time right? Where we'd be... where we would allow ourselves to become delisted. That would not serve anybody's purpose constructively.”
With regard to new equipment that was installed, are there any maintenance or reliability concerns?
“It's working well. We do the normal maintenance programs. So, if they're talking about plant reliability, plant maintenance, we have the break downs. Let's assume that's what they're asking. Are we having trouble managing the equipment? No.”
Why does management own such a relatively small amount of shares?
“We got diluted. So... I got diluted and lost more money in this company than you know, probably any one of your investors. I mean... that's a lot man. Like... it's ridiculous. That's from being diluted, and yet, that's what it takes, you know. We work through all of these things of scaling up technology, the lawsuits, and all the rest, and I don't like it either. But it is what it is, and we're still standing, which is better than anyone in our space is doing. They've all quit. The reason we're still standing is because we have products that work and markets that are viable. So, we believe in our product and what we do!This is not for the faint hearted at all. You have to have... people who know us know that we are the most stubborn people, focused people that they've ever met in terms of believing in what we're doing and why we're doing it. We have to work through our cap table. We have to fix it and get it figured out. Everything will make sense at the end, I imagine. We have work to do.”
As always, at the end of the interview, I opened the floor to Pat to let investors in on anything he wanted to share about GEVO. Here's what he had to offer:
“So one of the things that's hard for people to grasp is how big our plant at Luverne actually is in terms of the physicality of it. And the amount of volume, material flows and all the rest. People think of it as little pilot plants, and I can understand that. Because most everybody in our industry brags about how big they are and what they do... and they are in what we would call a pilot plant. Ours is million meter fermentors! This is big stuff. This is the type of equipment that you have to do right or people get killed. You know, it's that kind of a thing. The process flows are big enough to where you have to pay attention to it, you can't afford to make a mistake that causes damage. It's big consequences to stuff. So, this isn't the little leagues like most people play in. We've been in the big leagues.
I know people... all of us are impatient. We just want to make things go faster, but we're going to damn well do it carefully and make sure we know what's going on!
Now, with that backdrop, think of the progress. People said we couldn't manage our inceptions. Wrong! We can! Contrary to what people said. We've got that mastered. We've learned how to make isobutanol at the giant scale plants. Do I have much capacity as I want? No, but tell you what, we've got equipment installed and equipment individually that looks to have the capacity that we designed for. That is a million and a half gallons per year. Will we operate at that rate fully all the time? No, because we still have other things to work on in the plant. And learn to make sure how we integrate it, operate it, and you know, optimize it more fully.
Because what we're really doing is being focused on the next step where it gets us to be profitable. But how do you get to be profitable? Make a lot more isobutanol. But you know, I'd like to be able to deploy the smallest amount of capital for it to be possible to do that. That means taking this opportunity now to learn how best to do it and how best to make that proper impact.
So, in this last year, we installed equipment. We now can make fuel grade isobutanol at Luverne. We couldn't do that before, we had to ship it off site to Kodak where they distilled it for us to make it into fuel grade, or chemical grade. Now, we can make fuel grade at the plant and I expect that we'll be able to eventually make chemical grade as well. That's a big achievement. We figured out how to integrate the process... even with the ethanol, and deal with it without screwing up ethanol. That's a non-trivial operation in itself. We figured out how to do it. And by the way, the only way you learn it is to do it. You can speculate only so far, but you know, it takes.... you gotta go do this stuff.
You look at the marketplace, getting it into these products, in these fuel blend stocks and the supply chains that have to be established. We've been able to do that and be able to show that the value propositions are real and people will pay premiums for the product. Getting it distributed. Getting it all the way to consumers, getting the consumer feedback. All of that... we did.
On the jet fuel side, getting the jet fuel approved after six years of focus was... you know... nobody believed in us and that we could do a jet fuel when we started on this years ago. But we did! We did it, and we also did octane starting way back then. And we were able to get those products out into the marketplace and develop the value propositions and stories that go with it. There's lots of interest in the products.
When you add that all up and look at it, we have a viable technology that cuts across the giant fuel markets with strong value propositions. Yes, we have to restructure our debt. Yes, we have to do the capital formation so that we can build out Luverne further, but you know, when you stop and look at it, it's like, man, we've accomplished a lot where other people failed.”